Contracts

You have to love capitalism. I still believe the capitalistic system is the best around. But, the crazy things it can lead to. Everyone has heard about the Wells Fargo scandal. Bank tellers at Wells Fargo were required to open a certain amount of new accounts every month. The pressure was on to meet a certain goal every month. So, many Wells Fargo employees opened false accounts in the name of customers. They were so desperate to meet their goals, that they basically took money from customers to open accounts that the customers did not want.

Every bank customer at Wells Fargo signs an arbitration agreement when they open their account. Does that arbitration agreement apply to a fraudulent account? Yes, it does, according to early court opinions. Customers have tried to sue the bank for its fraudulent sales practices and have been stymied by the arbitration provision for the one true account. As one Los Angeles lawyer said, its “laughable to any logical person.” See Los Angeles Timesreport. In one instance, Wells Fargo opened eight accounts fraudulently in the name of one customer. But, a San Fransisco district court would not let him sue the bank.

Arbitration is often, paid-for justice. At least one study has shown that there is a “repeat player” effect. That is, an arbitrator will favor a repeat customer. In this context, Wells fargo would be the repeat player. They would have hundreds or more such arbitrations, while each customer likely has just the one. If there arbitrator wants more arbitrations, he knows he should find in favor of the repeat customer.

Yes, some employers will take advantage of employees. My friend, Chris McKinney, discusses one such case of a worker for Buc-ees. You know the place with the friendly, smiling beaver? Kelly Rieves was hired by Buc-ees as an assistant store manger in Cypress, Texas. They had her sign a contract which included a clause for “retention pay.” Retention pay is usually used for senior executives. But, Buc-ees imposed it on this assistant store manager. A portion of her pay, about one-third, was designated as retention pay. If she left before 48 months, she would agree to return that retention pay. She did in fact leave after three years. She tried to work out an agreement with her boss before she left. But, he would not discuss it.

The contract provided that she could be fired at anytime. Yet, the retention pay clause remained.

After she left, Buc-ees sued her. The friendly beaver sued her for the amount of retention pay, or $67,000. She lost the lawsuit. The court also awarded attorney’s fees and interest. Now, she owes $100,000. The matter is on appeal. See Chris’ blog post here.

I do not know the specifics of Ms. Rieves’ case. But, many workers who are sued for non-compete clauses often ignore the lawsuit. They hope the suit will go away. But, unfortunately, these lawsuits by prior employers do not just go away. Retention pay clauses might make sense for senior executives who have some bargaining leverage. But, seriously, for an assistant store manger, this is a case of an employer taking advantage of its superior bargaining position.

The sandwich chain, Jimmy John’s, has agreed to stop including non-compete agreements in its hiring documents. I wrote about the chain’s requirement for non-compete agreements here. As I mentioned then, they were requiring the low wage earners to sign these agreements. As part of a settlement, Jimmy John’s is now dropping that non-compete agreement. The non-compete imposed a two year time limit in which a departing Jimmy John’s worker could not work for a competitor within two miles. The sandwich chain was sued by the New York state Attorney General regarding the practice. See CNBC report.

It is a brutal tactic to use with the most vulnerable workers. Earlier, this year the Illinois Attorney General commenced a similar lawsuit. Jimmy John’s is headquartered in Illinois. The chain says it stopped issuing sample non-compete agreements to its franchisees in 2014.

Arbitration in employment cases is still new. It is also private. So, researchers have not had access to arbitration decisions or awards. But, a statute passed in California requires the arbitrators to make public their decisions. One Cornell researcher obtained those public awards and found some remarkable trends. The largest provider of arbitration services is the American Arbitration Association. AAA is also the only provider that provides protocols designed to protect employees from the worst sort of arbitration abuses. The report includes some 3900 AAA arbitration awards or decisions over a four year time period. I previously wrote about this study here. But, I want to mention some additional details.

Alexander Colvin found a “repeat player” effect. That is, repeat participants, employers with more than one claim filed against them, receive better results. Repeat players would also include repeat law firms. The unique aspect of employment arbitration is that the employee will almost always have only one arbitration in his/her life. Whereas, the employer may have multiple arbitration matters. The fear is that some arbitrators will curry favor to some degree with the employer in the hopes of securing additional arbitral matters. Most arbitrators are lawyers who have financial incentive to do more, not less, arbitrations. The more arbitrations they do, the more they get paid. Mr. Colvin found that in the “one-shot” employer situation, the employee would win 31.6% of the time. While, in the repeat employer situation, the employee win rate drops to 16.9% of the time. Regarding damages, when the employee did win in a one-shot employer situation, the mean damage award was $40,546. But, in the repeat employer situation, the mean damage award was only $16,134. So, workers have a better chance with the one-time employer, but even then their success rate is lower than in a traditional court.

Out of the 3900 cases, repeat employers included 62% of filings. There might have been more, but the four year window necessarily would have excluded some prior filings.

Compare the above win rates to other forums. Overall, the employee “wins” 21.4% in AAA arbitrations. In California federal court, the employee wins 36.4% of the time. In California state court, the employee wins 59% of the time. Yet, in securities arbitration, which has a much longer history than general employment arbitration, securities industry employees win arbitral hearings some 40-50%. Mr. Colvin does not attempt to explain why employment arbitration employees fare much worse than security dealers. He invites future researchers to answer that question.

Looking at a slightly different problem, what happens when the repeat employer uses the same arbitrator? Does that even make a difference? Mr. Colvin found some 15.9% of the cases included what he describes as “repeat pairings” – that is, the same employer with the same arbitrator. When cases did not involve a repeat pairing, the employee win rate was 18.6%. But, when you had a repeat pairing, the same arbitrator with the same employer, then the employee win rate slid down to 12%. The average damage award for non-repeat pairings was $27,039. But, when the same employer was paired with the same arbitrator, the average damage award was $7,451. So, when the employer has actually worked with the same arbitrator in the past, and the employer is not simply another employer who has done arbitration in the past, the success rate of the employee drops to 12%.

What is a “win”? Mr. Colvin defines a win as any positive finding in favor of the employee, no matter how small the award might be. He seeks the broadest measure of arbitral success as possible. Mr. Colvin suggests in his article that arbitration claims would have lower value than traditional court litigation claims. He is surely correct about that. See the article, An Empirical Study of Employment Arbitration: Case Outcome and Process, here.

Mr. Colvin noted significant differences in AAA arbitrations from individual arbitration agreements. AAA arbitrations are different because AAA requires any employer promulgated arbitration agreement to follow certain procedures. Those procedures ensure the employee pays only a modest fee for the the service. But, AAA arbitration matters that develop out of individual employment agreements see better results for the employee. But, as the researcher notes, individuals with his/her own arbitration agreement typically are higher ranking, are paid more and have much greater resources that the employer promulgated arbitration agreements. According to the data, some 82% of arbitration claimants were paid less than $100,000. So, the AAA arbitration results studied by Mr. Colvin represent by far the more typical experience for American workers.

This study is a stark reminder that employment arbitration is designed for employer success, not employee. The employer who has multiple claims will always come out ahead in this system. Civil-rights receive less protection in the arbitration context.

Large employers and corporations have been pushing arbitration as the panacea for a host of consumer issues, from purchasing phone plans and automobiles to applying for jobs. But, there are some things arbitration just cannot do. In 2012, Lance Armstrong admitted he had used drugs as part of his training regimen. But, for years before his admission, he had successfully fought those allegations. In fact, he even took to arbitration in 2006 one sponsor, SCA Promotions, for a $5 million bonus saying there was no proof that he had doped. The sponsor had refused to pay the bonus because the allegations were so strong. The arbitration panel eventually awarded the cyclist a total of $7.5 million – based on a settlement reached by SCA and Mr. Armstrong.

After Mr. Armstrong’s admissions in 2012, SCA asked the same arbitration panel to re-convene and order Armstrong to pay back the money. The panel did so and awarded SCA Promotions $10 million as a sanction. But, the panel of arbitrators is not a court. There is a very complicated, robust scheme for awarding sanctions in the judicial system. Arbitration is not part of the judicial system. Arbitration is based on contract. The parties must agree to arbitration. Arbitrations are supposed to be limited to the terms of the parties’ agreement. Lance Armstrong did not sign any agreement allowing possible sanctions as part of an arbitration award. It would be rare for any arbitration agreement to address even the remotest possibility of sanctions.

The panel found jurisdiction based on Mr. Armstrong coming to them twice before seeking relief. The majority panel pointed to the decision in Nielsen S.A. v. Animal Feeds International Corp., 130 S.Ct. 1758 (2010) for the finding that prior use of the panel amounts to continued use of the panel. The majority also pointed to an “implied covenant to cooperate” and to Mr. Armstrong’s bad faith. So, the majority awarded that the $7.5 million be repaid to SCA, $2 million in attorney fees, and $500,000 in “additional costs insusceptible of precise calculations” (say what? I can just imagine if I tried to ask a court for $5,000 in “additional costs insusceptible of precise calculations”).

One arbitrator on the panel dissented. Ted Lyon pointed to the 2006 settlement agreement between the parties that specifically provided the intent of the parties was to “fully and forever” resolve their differences. See Louisiana Bar Journal, vol. 63, no. 2 (Aug./Sept., 2015).

And, now SCA is seeking a declaratory action in a Texas court seeking recognition of the award. There is no legal precedent for this reconsideration of a prior award. In a traditional court, SCA would seek reconsideration based on new evidence. The new evidence would be Lance Armstrong’s very public confessions. The party would have a good chance of getting the settlement reversed. But, what happens when the “judicial system” is based on contract? The parties did not agree to sanctions. Arbitration was created in the nineteenth century for shipping companies to deal with the vagaries of international courts – or the lack of any courts. Now, these parties are trying to morph a system based on contract into a judicial system.

This reminds me of the old saw often heard in criminal court, “if you can’t do the time, don’t do the crime.” The saw refers to defendants who whine about his/her punishment. It means do not whine. We need a new saw for arbitration agreements, “if you don’t like the result, don’t sign the agreement.” SCA paid the bonus under the original agreement. SCA drafted the agreement to pay the bonus to Lance Armstrong. It was SCA who chose arbitration initially, not Lance Armstrong. But, now SCA is trying to turn arbitration into a full-blown court of law. Now,the company has second thoughts…..

Non-compete agreements have been used in the market place for decades within certain sectors, such as physicians and some sales representatives. In the past year or so, I have heard from several workers who signed non-compete agreements. One poor young woman, in her 20’s, was sued after she changed jobs. She simply moved to a job in the same field but at a higher rate of pay. There was no agreement with her new employer to bring a “secret” customer list or to solicit customers from the old employer. She simply changed jobs because the new employer offered higher pay.

Yet, the old employer filed suit against the young lady. The suit accused the young woman of stealing customers and damaging its referral program. The poor young woman kept telling me how the lawsuit was inaccurate, that only one customer switched, and that there was no referral- rewards program at the old employer. She seemed intent on convincing me that her cause was just. I could only smile and tell her well, those are good defenses, but you still have been sued. I suggested she ask the new employer about hiring a lawyer for her. But, she explained, all they did was hire her. There was no agreement or plan that she bring customers with her. The new employer will surely not be interested in helping her with the lawsuit. The young lady is paid perhaps $10 per hour. She cannot afford to hire a lawyer.

The old employer will seek a temporary restraining order that could limit her ability to work. So, this is a huge issue for this young woman.

I wrote previously about non-compete agreements at a fast food sandwich place, Jimmy John’s, here. Sheesh. You know non-compete agreements are ubiquitous when they are signed by the youngest workers, with the least experience.

Mike Leach was fired by Texas Tech over five years ago. He filed suit over that termination, saying it violated his contract. I previously wrote about his lawsuit here and here. He sued to force the state to honor its contract hiring him. But, his initial appeal was denied. And, now the Texas Supreme Court has also denied his appeal. See Fox Sports report.

Consider what the former Texas Tech Chancellor said about the firing of Coach Leach: “If you tell your boss to go f— themselves, then you will probably be dealing with your boss.” Kent Hance said he learned that in 3rd grade growing up in the Texas Panhandle. That does sound like good employer-employee advice. See Lubbock Avalanche-Journal news report. The administration asked Coach Leach to apologize to that student he punished. Coach Leach refused.

Most large employers have employee handbooks, those set of policies that explain things like vacation and sick leave, discipline, etc. Employers will often describe how they are “binding” and must be followed. But, legally, they are not binding, at all. They look thorough and professional and provide some comfort to employees in an uncertain world.

They are generally not binding on the employer. They are nothing more than a guideline. If the employer included a phrase providing they are not contractual, then they will not be binding. And, most, perhaps all employers do include non-binding type language in the handbook.

Arbitration is more and more with us, all of us. Every consumer signs some arbitration agreement sometime, somewhere. Arbitration is increasingly found in the work place. Many employers require their employers to sign agreements to submit any dispute to arbitration. SCA Promotions paid a $10 million dollar bonus to Lance Armstrong years ago for winning multiple Tours de France. Part of the agreement was a provision requiring any dispute to go to arbitration. In 2005, SCA refused to pay the bonus due to the early allegations of substance abuse. Mr. Armstrong had to file suit to get his payment.

Now, SCA has gone to arbitration to get a refund. In a recent ruling, three arbitrators, in a 2-1 vote, ordered that Lance re-pay the bonus. The one arbitrator voting against the decision was the one arbitrator chosen by Lance. See Huffington Post report.

Observers are saying this is the single largest arbitration award against a individual. Mr. Armstrong plans to fight the award. But, this is arbitration. There are no appeals. There is very little “fight” available to any participant. That is the whole point of arbitration.

Just when we thought the Texas Supreme Court cleared things up regarding non-compete agreements, the court issues another decision that muddies the water. In Exxon Mobil Co. v. Drennen, 2014 WL 4782974 (Tex. 2014), the court addressed a non-compete agreement in which the employee would forfeit deferred compensation (stock ownership) for violating the non-compete clause. The court found that a forfeiture clause did not fall within the definition of of “covenant” under the Covenants Not to Compete Act. Because, a forfeiture clause does not actually prohibit an employee from competing after leaving employment, said the court. The court also addressed its decision in Marsh U.S.C., Inc. v. Cook, 354 S.W.2d 764 (Tex. 2011). I previously discussed that decision here.

That decision, we thought, established that the consideration for a covenant not to compete only needs to be “reasonably realated” to an interest of the employer’s. The decision had stated that “goodwill” could serve as an employer’s interest that was worth protecting. That decision brought Texas jurisprudence more in line with the rest of the country and made covenants not to compete easier to enforce. But, the court in Drennen said the Marsh decision did not actually involve a covenant not to compete. The Marsh decision also involved a forfeiture of future compensation. But, the stock ownership plan in the Drennen case is different from that in Marsh, said the court. In Marsh, the employee was required to sign a non-compete agreement when he purchased stock. Here, however, Mr. Drennen was simply awarded stock in return for hard work and loyalty. The exchange, said the court, was continued loyalty (by Mr. Drennen) in return for for stock options (by Exxon).

The Drennen court then found that New York law would apply under the choice of law provision in the agreement. See decision here.

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Thomas J. Crane focuses on cases involving wrongful conduct by the employer. He has been practicing employment law for 20 years. He had his own law practice in San Antonio for many years prior to being called to active duty.